With an ever-increasing amount of investing platforms, products, and vehicles out there, you might be wondering if it’s time to gain accredited investor status. After all, this is a requirement for many of the top fractional investing companies and crowdfunding websites pitching their latest and most significant opportunities. After reading up on the accredited investor rule 501, you may have more questions than answers.
Without the coveted accredited investor certification, you may be feeling excluded from some of the most innovative assets in the history of investing. “Why should the ultra-rich have the ability to pack their portfolio with an assortment of unique offerings when I’m stuck with mutual funds from T. Rowe Price,” you might be asking yourself.
If you’re not an accredited investor yet, don’t panic. First, we need to understand the basics of why there is an accredited investor certification in the first place. Second, we can decide if it’s something we should consider. And lastly, we will have an idea of what the future might bring to the average investor and collector of valuable assets.
Accredited Investor Rule 501
Rule 501 of Regulation D defines the term accredited investor as a person or entity who is authorized to deal in securities that may not be registered with the financial authorities. The goal is to ensure participating investors are financially sophisticated and can sustain the risk of loss. Therefore, investors in securities that are not registered must meet one of the two following requirements.
- Accredited investors must have an earned income exceeding $200,000 in each of the prior two years, $300,000 together with a spouse, or
- Have a net worth over $1 million either alone or with a spouse, excluding equity in your primary residence.
The companies offering securities are held accountable by the SEC to only allow accredited investors to invest in their products. Therefore, it’s in the investment firm’s interest to be sure you qualify. You will be expected to provide financial statements, tax returns, W-2’s, and other documents confirming you meet the requirements.
Under the Securities Act of 1933, anyone selling securities is required to register with the United States Securities and Exchange Commission. Regulation D provides a way around this requirement of registration if you follow specific guidelines. By following the instructions outlined in Regulation D, companies can sell securities without registering with the SEC.
We’ve already discussed Rule 501, which defines an accredited investor. However, there’s a total of eight rules to Reg D which should be understood.
- Rule 501 – Accredited investor definition
- Rule 502 – Sales of securities in a specific time frame must be integrated as one offering. Information and disclosures must be provided. No, “general solicitation” is allowed. Restrictions of the resale of securities.
- Rule 503 – Requirement to file Form D with the SEC.
- Rule 504 & 505 – Securities issued under $5 million exempt from registration.
- Rule 506 – Details a “safe harbor,” where registration is not needed for non-public offerings.
- Rule 507 – Penalties for not filing Form D.
- Rule 508 – SEC enforcement.
In 2013, the SEC issued new regulations allowing public advertising of Reg D offers to accredited investors, within certain guidelines.
Reg A Tier 2
Under the Securities Act of 1933, each company seeking to offer securities for sale to the public must be registered with the SEC or qualify for a registration exemption. Reg A is an exemption from registration for public offerings. In 2015, the SEC adopted rules to expand Regulation A into two tiers.
Tier 2 offerings allow accredited investors to buy securities without limitation. Non-accredited investors can also buy securities that qualify under Reg A Tier 2 but with a few limitations. Tier 2 offerings require audited financial statements where Tier 1 offerings do not. Tier 2 offerings need to file annual, semi-annual, and current reports with the SEC on their securities.
Reg A Tier 2 has emerged as the best way to offer securities to people who are non-accredited investors. There’s a higher limit on the amount of capital that can be raised from a security, but fewer statewide restrictions. Several fractional ownership and investment companies cite “Reg A Tier 2” as to how they are conducting their offerings. Some non-accredited investor companies disclose that membership interests “are being offered and sold to qualified investors under Tier II of Regulation A under the Securities Act.”
Jumpstart Our Business Startups Act (The JOBS Act)
The JOBS Act law was enacted as a way to encourage funding for small businesses by easing securities regulations. After the financial crisis of 2008 – 2009, attempts to increase economic growth were underway in Washington, D.C. Congress found themselves with an assortment of bills trying to ease financial regulations and spur business activity.
Legendary investor and all-around great guy Naval Ravikant, who worked on the JOBS ACT reform was quoted as saying, “It ended up being a giant dog’s breakfast of different bills combined together, and then some genius, probably some congressional staffer, said “How are we gonna get this thing to pass? Oh – let’s say it has something to do with jobs. Jump starting Our Business Startups! JOBS, JOBS!” And then, what congress person can vote against something called the JOBS Act? It was a miracle.”
There are seven Titles in the JOBS Act bill that was signed into law on April 5th, 2012. Out of the seven “Titles” included in the JOBS Act, there is one that I’d like to focus on here, which is known as Title III, “Crowdfunding.”
Title III of the JOBS Act is a work in progress. Reform has already been considered by way of raising the $1 million cap to $5 million. It also has been revised to include a “test the waters” provision where investor interest can be gauged before opening a public security offering. To protect investors further, security purchases cannot be made directly but only by going through a broker-dealer intermediary. These broker-dealers must be registered with the SEC and be a member of FINRA.
Title III of the jobs act was enacted in 2016, when the equity crowdfunding rules from the SEC finally took effect. The bill and the potential application took some time to digest. Unit this bill took effect, the sale of securities in private companies were only accessible to accredited investors. Now, a wide range of crowdfunding companies are offering products to individual investors with initial investments for as little as $20.
Non-Accredited Investor Platforms
From commercial real estate to startups, to collector cars and sports memorabilia, non-accredited individuals now have the ability to invest in assets like never before. Here are just a few of the platforms with offerings to non-accredited investors.
Start-ups and Business Equity
Where Are We Headed
Many of us want the ability to diversify beyond the conventional public stock markets and company 401k accounts. People begin to research new ways to invest and are soon disappointed to find the investment they want to make is available to “accredited investors” only. From there, they begin the search on what it takes to become accredited and what documents to file, and so on. The facts are that many won’t qualify as accredited now, or ever. Others are o-so close to qualifying but unsure how, or when, they will put themselves past the “accredited investor” goal line.
So if you are an accredited investor already, that’s great. But if you’re not yet, I have a few final words of encouragement for you. Hang in there, changes to existing laws are in the works. Begin to investigate the companies and offerings featured with non-accredited status. Lastly, keep in mind that the pace of change is beginning to accelerate at the exciting crossroads of finance and technology. There’s no good reason access to investment products should be restricted to only a small percentage of the population. Limiting alternative asset investing to the wealthy is a thing of the past.